Seller Financing Dodd Frank Exemptions in each state

[Terry Lewis]

I am an MLO in California. The Exemptions in California follow the Federal law. I am doing a survey. What are the laws in each of the other states with respect to exemptions and seller financing?

Thanks in advance for your responses.

Terry Lewis

SELLERS PROCESS FOR DETERMINING EXEMPTIONS

INVESTOR IS THE BUYER WITH THE SELLER CARRYING THE LOAN

Seller must determine if the buyer is an investor or “consumer” defined in the DFA. “If buyer is an investor the transaction is exempt.”

1 TRANSACTION PER 12 MONTHS

a) Seller must determine if the buyer is an investor or “consumer” defined in the DFA

b) Seller is a natural person, "not a Corporation, LLC, partnership, trust, estate, etc."

c) The seller did not construct the property

d) The financing has a fixed rate or does not adjust for the first 5 years, a balloon is allowed

e) No negative amortization

3 TRANSACTIONS PER 12 MONTHS

a) Seller must determine if the buyer is an investor or “consumer” defined in the DFA

b) Seller is a natural person, "or" a Corporation, LLC, partnership, trust, estate, etc."

c) The seller did not construct the property

d) The financing has a fixed rate or does not adjust for the first 5 years, a balloon is not allowed

e) The borrower has a reasonable ability to repay the loanThe loan is fully amortized (no balloon)

ALL OTHER SCENARIOS REQUIRE A MORTGAGE LOAN ORIGINATORS LICENSE AND ALL REQUIRED TILA, HOEPA, RESPA, AND HUD, COMPLIANCE UNDER THE DFA.

Violations of the Acts all under oversight of the CFPB are subject to Federal and State fines, and rescission of the sale,

[Bill Gulley]

Craig, an option where the option price is paid in full as one payment is not a financing contract.

Options generally apply to an agreed sale price, not a legal requirement but customary. If the option price has installment payments with the amounts credited to the sale price you have a financing arrangement.

For all the thinkers out there, agreeing to a lower than market price after an option price has been paid without credits to the sale price is still a financing arrangement.

If you have any conditions requiring performance by a buyer/tenant in connection with an option, where performance is required in order to exercise the option, you don't have an option and you may have a financing contract taking a payment that reduced the sale price. A down payment or earnest money on a purchase contract is not a financing contract but consideration.

Terry, qualifications for exempt loans can be more complicated than that, homeowners selling their principal residence are generally exempt. A dealer, in the business of real estate and providing financing has two issues, one the exempt sale but also unrelated to Dodd Frank can be mortgage brokerage laws. A seller who sells to a rehab guy investor, who has the intent of selling, but finds he can't sell and later moves in now has a consumer loan. Notes can change classifications depending on use of the property. Some homes are zoned in commercial areas, a seller might assume it will be a commercial loan, but if the buyer moves in using it as a residence, it's a consumer loan.

The difficult thing about taking a survey, which I'd like to see too, is that the respondents may read the listed "possible" exemptions and fail to look at the difference that some states apply as to an owner selling and someone being in the business of financing real estate sales, or land that may be used to build a residence. Just saying, we might get an idea but I wouldn't rely on non-lenders reading compliance requirements as there can be other requirements beyond the initial Dodd-Frank matters.......and, if the lender does fall into a dealer/broker category, then different aspects of Dodd-Frank can apply. Simply put, nationally, it's a bit of a mess.

 We have had good and bad posted here about the DF Act and SAFE Act, I did listen to any attorney seminar (D-F expert, but not really) that broke it down quite well for investors, except that he went on to employ trusts, business entities, family members and other types of convoluted exchanges to justify staying within the exemptions. I'd have to say he missed that part of the Act which stated that "any method or scheme" employed with the intent of circumventing the Act would be a covered transaction. They will also look "behind the door" as to principles in any type of entity or partnership (married or not) as to who benefits from such activity. You're not going to get away with you and your family setting up 50 LLCs and financing through different entities.

Just saying, nailing down exemptions can be a bit more difficult than reading an initial laundry list under one aspect of state law, so while I'd like to see state specifics too, without having to go to each state and dig, as I started to do, would be interesting but caution on relying on such responses.

Actually, the best thing might be to call the state department of finance and run by the pending deal and ask if you need to comply as a consumer loan originator, they might just tell you......but they will also tell you or not, that taking that answer would be a lot like calling  the IRS for tax assistance, the tax payer is ultimately responsible. Another way is to ask a RMLO, regardless, it won't hurt to assume compliance being required.

Last thought on exempt loans, this goes to note buyers/sellers, better pay attention to notes that are claimed to have been exempt! The due diligence to show or prove Harry Homeowner lived in that house hasn't surfaced yet no has the ability to prove that note was the second under three exemptions, or that the classification didn't change or, that it wasn't wrongfully originated but the borrower moved out leasing the place, can't really make an illegally generated note go lawful 100%. Best practice, IMO, is to have a RMLO make a determination of an exemption and squeeze that letter of opinion, attaching it to the note and buy the RMLO lunch, an honest one shouldn't hold you up for an opinion! :)

Back to the count down, about 1100 shy last time I looked :)